“The most powerful force in the Universe is compound interest!” – Albert Einstein
Einstein was amazed at the effect compounding interest could have on an individuals wealth. Had Einstein come across dividend growth stocks, the super compounders of investing, he would have truly been blown away.
Dividend growth stocks offer investors a compounding effect beyond any other type of investment. There are not just one, not just two but in fact there are THREE ways a dividend growth stock can work at compounding wise investors wealth over time.
The Three Ways Dividend Growth Stocks Compound
- Stocks of any kind have a compounding effect through stock market returns. An X% return this year builds upon the returns of last year, the year before that and many many years before that. Each year the market increases it is compounding on prior years gains.
- The growth of the dividend rate has a compounding effect on our income. An X% dividend growth rate this year builds upon the growth from all prior years.
- By reinvesting dividends, investors can take advantage of the third type of compounding. Each additional share an investor purchases by reinvesting their dividend income will then begin earning it’s own dividend income. These new shares allow us to earn more dividend income that investors can then put to work to earn even more dividend income. Reinvesting dividends also allows wise investors the opportunity to take even greater advantage of the first type of compounding.
The Power of Compounding Dividend Growth Stocks
Take a look at the chart below to get an idea of how much power dividend growth stocks can have when it comes to growing your overall wealth.
|Start Age||End Age||Total Years||Annual Contribution||Final Value|
|20||65||45||$ 5,000.00||$ 2,726,021.66|
|25||65||40||$ 5,000.00||$ 1,777,784.28|
|30||65||35||$ 5,000.00||$ 1,152,224.48|
|35||65||30||$ 5,000.00||$ 739,537.68|
|40||65||25||$ 5,000.00||$ 467,284.89|
|45||65||20||$ 5,000.00||$ 287,677.54|
|50||65||15||$ 5,000.00||$ 169,189.14|
|55||65||10||$ 5,000.00||$ 91,021.36|
|60||65||5||$ 5,000.00||$ 39,453.50|
The above chart assumes a person makes $5,000 investments each year. It also assumes that the portfolio earns a 3.5% dividend yield that is reinvested and earns 5% market returns.
This chart shows the effect compounding can have for a dividend growth investor. If one starts at a fairly young age, they can save a small amount of just $5,000 a year and grow their portfolio well above $1,000,000.
At retirement age, the investor can begin collecting the dividend income in cash rather than reinvesting. This will allow the investor to live completely off of dividend income to cover their expenses and spending.
This chart is one example of what can happen over time for a dividend growth investor. Depending on growth factors, the ending result could be much much higher.
The end result depends on 3 factors:
- Number of years one has to allow compounding to work.
- Amount invested each year.
- Growth rates of dividends and market value of stocks over time.
The larger any of those factors are, the greater amount of wealth one will have when they are ready for retirement.
There are many different ways dividend growth stocks compound to help investors create wealth over time. Investors can create a very sizable nest egg by starting young, investing a portion of annual earnings, reinvesting dividends and earning a decent return from the overall market.
Don’t be delayed. Take advantage of what Einstein believed to be the 8th wonder of the world! Get the ball rolling and after time, compounding will start working miracles in your portfolio as well!
If you are interested in building a compounding wealth machine using dividend growth stocks then you should sign up for the free Dividend Growth Stock Investing Newsletter!
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